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Russia's Oil Industry Is Doing Fine, Which Is Great News For The Kremlin

Russia’s economy had a pretty bad 2013 and there’s simply no point in arguing otherwise. The economy decelerated sharply and is likely to end up with somewhere between 1.3 and 1.4% overall growth. That’s not the apocalypse (heck, it’s not even a recession) but it’s clearly sub-par. Such low growth will quickly become an enormous problem for the authorities if it continues for much longer.

But among all the (justified!) doom and gloom there was a bit of a silver lining: Russia’s oil production just hit another post-Soviet peak. This obviously doesn’t fix Russia’s large and growing number of economic difficulties, nor does it “justify” the policies of the Russian government. But considering the importance of oil to Russia’s political, economic, and social stability, it’s worth taking a look at a few charts to put the country’s current situation in context.

The first is a chart of both Russian oil production and the average price of Brent Crude. This chart is nice because it gives a pretty good indication of the magnitude both of the run-up in oil prices since the late 1990′s and also of the increase in Russian production. Yes it’s true that the pace of production increases in Russia has tailed off, something which people usually associate this with the jailing of Mikhail Khodorkovsky and the re-assertion of state control in the energy sector. Nonetheless, Russia has still managed to achieve annual increases in oil production for 13 out of the past 14 years, a real-world performance that was much better than most estimates.

The next chart worth considering shows the total amount of money that Russian earns through selling oil, an estimate I developed using historical production and price data from the incredibly useful website of the Energy Information Administration. When you combine the huge increase in crude oil prices that has taken place since the late 1990′s with the substantial increase in Russian oil production, you get a truly spectacular rise in earnings. When Putin first came to power Russia earned about $41 billion from oil sales. Last year it earned about $415 billion. That’s a lot of petro rubles.

Russia’s economy is obviously about a lot more than pumping black stuff out of the ground: at market prices only about 20% of Russia’s GDP comes from oil production. So even if the oil sector performs well, the performance of the other 80% of the economy matters a lot more. Russia’s overall economy can continue to perform quite poorly even if oil production continues to grow and oil prices stay high.

But oil is important because, to use a bit of a crude turn of phrase, it essentially functions as a Kremlin slush fund. The Russian oil sector faces some of the highest taxes in the world, and the Russian government captures a staggeringly high percentage of the cost of each barrel. This money then courses through the veins of the Russian economy: some of it is used to pay pensions, some of it is used to subsidize other inefficient industries, and some of it, of course, simply disappears down the black hole of corruption.

My point is not that the Kremlin is a particularly efficient or astute allocator of oil wealth, merely that it now has such enormous resources at its disposal that it will likely find a way to keep itself in power. A government with access to hundreds of billions of dollars of oil money seems like a government that will be around for awhile, particularly given how robust oil prices have been in the face of sustained economic weakness in the developed world.

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and i wish one day the whole world is stopped being dependent on google, youtube, facebook, yahoo, mcdonalds, microsoft, apple and other shit sucking all our wealth and along that are spieng on the whole world and raging wars in the middle east.

If I was a Russophobe I would be very happy about this news. First of all, it will ensure that there will be no economic reforms in Russia. Recession would force a reform from below, higher growth would enable reformaziya from above. Neither is going to happen. And without economic reforms, Russia decays slowly economically, politically and culturally, before total collapse. Long term prospects are very, very Central African. Child soldiers, mass rapes, cult of cannibalism, total anarchy are at the end of that road (it has happened before)

Secondly, at the moment the economy is functioning enough to keep the dream of a water closet alive for the other half of the Russian population, and make the other half afraid of losing it. Both halves are convinced that any political rocking of the boat means bodily business in outhouses forever/again. So there will be no push for political reforms from below either. WIthout political reforms Russia is going to grave with Putinism (which might not end with Putin).

Thirdly, tiny economic growth will greatly limit Putin’s room for maneuver domestically (increasing Chechenization of Russian regions) and more importantly internationally. It is not just the Russian leadeship that will become increasingly isolated, but also the Russian population. Georgians, Moldovans and Ukrainians will have visa freedom with the Schengen area, Russians not so much. They are trapped. Increasing international ridicule and isolation will lead to North-Koreanization of the polictics. By the end of the 20s I’m expecting to hear executions-by-dogs stories from Russia, too.

Don’t forget that another significant source of revenue is from customs and duties. If oil production grows then Russian companies drive imports into Russia which then also contributes to Russia’s budget. I am not sure exactly but I believe imports make up roughly nearly the same amount as oil revenues. However, I would like to see actual figures on this.

Export of oil and gas is 60%, it is very interesting to me and you it is aware that goods from Russia are exposed to discrimination and are assessed with increased taxes, it is one of the reasons why Russia so persistently holds Ukraine in case of signing of the contract with Europe Russia will lose export of industrial goods on 30 billion dollars.

I don’t know where you actually got your oil price data, but your chart is definitely way off from the EIA data you link to later in your article – and from reality (for instance, Brent went well above the $100 mark in 2008).